The Theory of Storage and Price Dynamics of Agricultural Commodity Futures: The Case of Corn and Wheat
32 Pages Posted: 24 Feb 2002 Last revised: 5 Oct 2008
Date Written: January 2004
Using a restricted version of the BEKK model we test an implication of the theory of storage that supply-and-demand fundamentals affect the price dynamics of agricultural commodities. The commodities under analysis are corn and wheat. An interest-storage-adjusted-spread was used as a proxy variable for supply-and-demand fundamentals to test the aforementioned implication for both commodities. We also test the Samuelson hypothesis that spot prices have higher volatility than futures prices. We found that the interest-storage-adjusted-spread has had a statistically significant positive influence on the spot and futures returns for both commodities. Likewise, the results also show that spot price returns have higher volatility compared to futures price returns which is consistent with the Samuelson hypothesis. The results of the aforementioned tests are consistent with both theories and with the existing literature related to commodity futures.
Keywords: Agricultural commodities, BEKK model, multivariate GARCH, Samuelson hypothesis, theory of storage
JEL Classification: C22, Q14
Suggested Citation: Suggested Citation